403(b) Withdrawal Rules, Account Options, Loans and More

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If you work in certain employment sectors, you can access different types of retirement accounts than you can with jobs that are typically limited to traditional 401(k) investing. Self-employed ministers, employees of public schools and workers at 501(c)(3) nonprofit organizations are eligible to save for retirement through what’s called a 403(b) account. Contributions to these accounts come as pre-tax payroll deductions, and some jobs offer employer matching for contributions you make.

Administrators of 403(b) accounts invest the money in annuities and mutual funds to earn you returns that boost your account’s value and help fund your retirement. Like other retirement accounts, 403(b) accounts follow IRS regulations. So, if you have one of these accounts, it’s important to understand the key rules surrounding them. Here’s where to get started.

When Can You Withdraw From a 403(b) Account?

Because the purpose of a 403(b) account is to help you save for retirement, safeguards are set in place to encourage you to allow your savings to keep growing instead of making early withdrawals. However, the funds in the account belong to the account holder, so you can withdraw your funds at any time — there are just a few caveats.

When you turn 59.5 years old, you can withdraw money from your 403(b) account without paying a tax penalty. If you retire early, you can withdraw funds when you’re 55 as long as you’re already retired. If you pass away before you retire or reach either of the age thresholds, your beneficiaries can have access to your savings without paying a tax penalty. 

Types of 403(b) Withdrawals

There are three different types of 403(b) withdrawals you can opt for that fall outside of the normal disbursement of funds when you retire or turn age 59.5. You can take an early withdrawal, take a hardship withdrawal or take out a loan from your own 403(b) account. 

An early withdrawal takes place when you withdraw before you’re within retirement age. If you withdraw money from your 403(b) early, there’s a 10% fee and the money you withdraw counts as income on your taxes. 

If you run into financial hardship, you may be able to utilize a hardship withdrawal. You can only withdraw the exact amount needed to pay for the hardship. The money you withdraw still counts as taxable income, and you do owe the 10% fee. Some plans don’t recognize hardship withdrawals.

Different 403(b) plan administrators recognize different life events as hardships, so you’ll want to check with your plan administrator to see which situations apply. Some allow for a hardship withdrawal to cover the downpayment to purchase a home. Others allow hardship withdrawals to cover your tuition if you go back to school. Many plans recognize medical bills not covered by insurance, foreclosure and eviction as hardships. 

The third type of withdrawal is a loan. With this type of withdrawal, you borrow money from your plan and follow a schedule to repay it. Your plan administrator determines your repayment schedule in this scenario.

How to Borrow From Your 403(b) Plan

You can only take out a loan from your 403(b) account if your plan’s administrator allows loans. The plan administrator also sets rules you need to follow if you’re permitted to take out a loan. To avoid paying taxes on the money you borrow, you need to abide by all the rules and make your payments on time.

The IRS places limits on loans, too. You can never borrow more than half of what you contributed to the account. The highest loan amount, even if 50% of your contributions is a higher number, is $50,000.Your plan administrator may allow you to take out more than one loan at a time, but the sum of all your active loans cannot exceed the IRS maximum.

The plan administrator will explain the loan amount, terms and payment schedule in an agreement that you sign. The scheduled length of the loan cannot exceed five years. The plan administrator can charge interest, and you’ll make payments at least once per quarter. If you don’t repay the loan, the money becomes an early withdrawal that’s subject to penalties.

403(b) Account Withdrawal Rules

Loans paid on time and scenarios that fall under IRS exceptions are the only instances in which there’s no fee for taking an early withdrawal from your 403(b) account. Otherwise, if you make withdrawals before retirement or age 59.5, you’ll pay taxes on the income and pay a fee of 10% of the withdrawal amount. 

Some exceptions to the rule include leaving a job that’s 403(b) eligible for one that’s ineligible, becoming disabled, dying or being subject to a domestic relations order that diverts the money toward child support or alimony payments. There are still rules for these exceptions. Even if you qualify for one, carefully follow the specific standards to avoid paying taxes on the money. 

403(b) Account Withdrawals at Retirement Age

When you retire or turn 59.5, you can decide how to withdraw your money. You might base your decision on the amount of money in your 403(b) account and the amount of monthly retirement income you’ll receive from other sources, such as social security or a pension.

You can choose a total withdrawal to get all of your savings in one lump sum. A partial withdrawal option allows you to take your money in increments spaced out anywhere from one to three times per year. You can also schedule your withdrawals to pay you a set amount on a schedule — monthly, annually, twice a year or even every quarter. It’s common for people who aren’t retired — but who have reached the age where they can withdraw without penalty — to choose a declining balance withdrawal that will distribute the funds throughout their retirement years. 

To decide if a form of early withdrawal is right for you, compare the cost of the associated tax burden and 10% penalty with the total cost of any other form of financing you have available. An early withdrawal may be your best option if you’re unable to obtain funds from another source. However, using retirement savings early and possibly pushing yourself into a higher income tax bracket for the year is a serious decision. A financial advisor or your retirement plan administrator can be a good resource to help weigh your options.